In this article I will describe another barrier to the successful implementation of indemnities: Physicians have market power to charge prices higher than their marginal costs. Without correcting this problem, patients would be overmatched by providers in the marketplace. I argue, however, that three steps can be taken to make the market more competitive.
One objection certain to be raised against Medicare indemnities is that patients, like sheep turned loose amid a pack of wolves, would be hopelessly overmatched by providers in the marketplace for Part B services. According to proponents of this view, patients would wind up paying far more for Medicare Part B services under an indemnity program than they do with the current system of price controls.
I would like to discuss this objection from two different perspectives. First, is the market for physicians' services competitive? Second, if it is not competitive, what should we do about it? Plenty of evidence shows that while the market for physicians' services does not fit the model of pure monopoly, it is far from competitive. This evidence was summarized nicely by Frech, who drew the following contrast: If the market were perfectly competitive, an individual physician who raised his or her price by a small amount would lose 100 percent of his or her patients to other physicians; but if each physician were a pure monopolist, the same price increase would result in no loss of patients to other physicians (the only loss of patients experienced by a pure monopolist would occur because some patients would make fewer visits). These contrasting cases can be framed in terms of the "price elasticity of demand," which measures the percentage change in quantity demanded divided by a 1 percent change in price. Individual physicians in a perfectly competitive market would face infinitely elastic demand curves, while pure monopolists would face demand curves that have the same price elasticity as the total market demand for physicians' services.
Physicians and hospital systems have consolidated to achieve negotiating leverage with health plans. In sum, the current market for physicians' services is not competitive, and subjective evidence indicates that physicians' market power vis-à-vis private health plans is increasing. What should we do about this mess?
The regulatory response would reduce the overall level of Medicare fees. But this does not solve the problem of market power, and, given the limitations on balance billing, most economic models predict that lower fees eventually would squeeze Medicare patients out of the market because physicians would supply more services to more remunerative private patients. Sooner or later, we would expect to see signs of lower Medicare quality (for example, shorter visits and longer waiting times to get appointments) and more physicians refusing to accept Medicare patients. These predictions are consistent with evidence that physicians' willingness to accept Medicare assignment is highly related to reimbursement levels.
More recentlysome have examined the importance of reimbursement and other factors in determining physicians' willingness to accept new Medicare patients. Among general and family practitioners, they found that the fee index had a large positive effect, with a 10 percent increase in the index associated with an increase of roughly five percentage points in the likelihood of accepting all new Medicare patients. The fee level did not, however, have a significant effect on general internists' willingness to accept new Medicare patients. The authors noted several possible explanations for this finding, such as the lack of variation in the fee index for internists and the importance of Medicare revenue for this specialty, with the implication that an internist may have difficulty operating a viable practice without accepting new Medicare patients. Regarding quality of services, MedPAC's official position is that the level of payments to physicians is positively related to their ability to furnish high-quality services). Another problem with reducing Medicare fees is that Medicare doesn't exist in a vacuum. Virtually all types of medical care used by Medicare beneficiaries, with the possible exception of treatment for end-stage renal disease, are also used by individuals with private insurance.
We analyzed the problems that arise when there are multiple payers (for example, Medicare and private insurance) and a monopolistic provider. The monopolist will supply services to each payer so that the marginal revenue from privately insured patients equals the Medicare fee and the marginal cost of services, assuming that marginal costs are the same in both markets. Now suppose that Medicare used its buying power to determine the fees it pays to doctors. Even if Medicare set the right price (that is, one that resulted in physicians supplying the quantity of services that Medicare wanted to buy), the private price would exceed the marginal cost because of monopoly power in the private insurance market. Consequently, Medicare cannot use its buying power to solve the problem of providers' market power when there are multiple payers in the market.
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